Three Essays in Corporate Finance

Applications of information asymmetry to various contexts in corporate finance;Finance;Business and Economics;Business Administration

Chhabra, RahulSchmalz, Martin C ;

University of Michigan

关键词: Applications of information asymmetry to various contexts in corporate finance;    Finance;    Business and Economics;    Business Administration;   

Others  :  https://deepblue.lib.umich.edu/bitstream/handle/2027.42/145952/rahulchh_1.pdf?sequence=1&isAllowed=y

瑞士|英语

来源: The Illinois Digital Environment for Access to Learning and Scholarship

【 摘 要 】

This dissertation consists of three essays in corporate finance. The essays study the applications of information friction to various contexts in corporate finance. In the first essay, I study a board;;s decision to fire or retain a CEO when board members care about their reputation in the labor market for directors. These concerns give the board an incentive to overweight public information and penalize (reward) the CEO for bad (good) luck, leading to an increase in turnover-performance sensitivity. I test the empirical predictions of the model using promotions of existing directors as a proxy for an increase in their reputational concerns. I find turnover-performance sensitivity is greater when a director is promoted. Further, I find CEO retention after a director takes on a new role culminates in lower future firm performance. Overall, the results suggest directors;; incentives due to reputational concerns result in inefficient firing decisions.In the second essay, I study the effect of a decrease in the analyst coverage on the covenants of a firm;;s debt contracts. The decrease in analyst coverage is caused by dismissal of redundant analysts after mergers of brokerage houses during 1984-2005. I find that the likelihood of inclusion of covenants and the number of covenants in debt contracts are greater for firms which had lower analyst coverage. These findings suggest that the creditors take measures to counteract the increase in the agency costs by increasing the restrictiveness of thecontracts.In the third essay, that is joint work with Sugato Bhattacharyya, I model a firm run by a manager who invests in a technology with uncertain returns. The manager has incentives to learn about fundamentals from the stock price, as well as to acquire her own private information to make better investment decisions. However, such learning increases information asymmetry between the informed trader and the liquidity traders because the informed trader;;s private information now allows him to predict the manager;;s actions. The greater information asymmetry results in greater price impact and greater price volatility but does not affect the trading volume or price informativeness. Importantly, the greater information asymmetry that arises due to the manager acquiring private information (but not the asymmetry due to her learning from the stock price) results in greater expected profits to the informed trader. The model suggests that manager;;s learning increases the incentives of the informed trader to gather precise information.